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Home Publications Blogs CEPR Blog Lip-Service Libertarianism in Silicon Valley

Lip-Service Libertarianism in Silicon Valley

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Written by Jeffrey Gianattasio   
Tuesday, 08 April 2014 14:44

Silicon Valley has for some time prided itself on a supposedly novel approach to corporate practice. High-tech firms, and the luminaries who lead them, have espoused doctrines pledging to think differently, not be evil, or otherwise changing or breaking with traditional corporate behavior. While these firms may at times fail to live up to their high-minded ideals – accumulating vast cash reserves beyond the purview of the US tax code, and shifting their workforces overseas, much like their corporate peers outside of the Valley – they have gotten a pass from much of the public for their well-minded intentions (not to mention savvy marketing campaigns).

Recently, however, these Silicon Valley firms have come under criticism. Last year, George Packer published a scathing assessment of Silicon Valley’s peculiar mix of libertarianism and idealism, and HBO recently piloted a new show giving a sardonic look at Silicon Valley life. With the technology sector playing such a large role in the US economy, Silicon Valley executives have President Obama’s ear, and it is natural that the rest of us are listening to what they ask for. But perhaps the greatest blow that has been struck against this carefully constructed image was the allegation revealed earlier this year that a number of Silicon Valley firms may have been colluding to hold down workers’ wages for the better part of the past decade.

As meticulously detailed by Mark Ames (here and here), the executives from a number of prominent US technology firms, led by Apple, Intel, Google, and others, appear to have made a series of informal agreements in the mid-2000’s to refrain from recruiting each other’s employees. The emails seem to indicate that certain Silicon Valley firms kept a list of corporate rivals whose employees were designated as ‘hands-off.’ Such a practice would have dramatically reduced the competition in the labor market for tech employees by curtailing workers’ mobility, artificially depressing the wage growth of workers in this sector. Ames notes that these practices potentially affected the salaries of over one million workers.

If these allegations are proven true, the practice is surely condemnable – not to mention illegal. Yet these allegations would not be so especially damning if not for the fact that many of the very executives involved in this cartel-like behavior have been vocally complaining for many years about the skills shortage in the US labor market. Sometimes these complaints were couched in terms of the immigration debate: Silicon Valley firms have been quite vocal about expanding the cap on the US’s H1-B visa for high-skilled tech workers. Other times, these ‘skill shortage’ arguments were deployed as evidence for the view that the US educational system is not producing a sufficient quantity and/or quality of STEM graduates. (These arguments about a ‘skill shortage’ have been debunked by both EPI and the Chronicle of Higher Education [PDF]).

Given these firms’ apparent campaigns to distort the US high-tech labor market, these concerns about H1-B visas and the US’s STEM education begin to ring false. Instead of honest concerns about a ‘skills gap’ blunting this nation’s competitive edge, these political appeals to expand the H1-B visa and STEM education should be re-evaluated as part of a broader desire to weaken the bargaining power of US technology workers. The former (H1-B) by introducing low-cost substitute workers from abroad (with the added bonus of not being able to leave their job without also leaving the country), and the latter by saturating the high-tech labor market with fresh, young talent, introducing slack which will help keep wages down.

Below, I have collected a number of relevant quotations from Silicon Valley executives on the ‘skills shortage,’ which are contrasted with text from the emails giving evidence of cartel-behavior. While it may seem that I am just having a bit of fun at their expense, this exercise is also useful in deconstructing some of the myths propagated by the Silicon Valley corporate elite. Rather than thinking differently, or not being evil, these firms have instead engaged in a form of collusion so storied that Adam Smith himself was warning us of it back in 1776.

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Intel was a key player in these agreements, and sure enough, we find Intel president Paul Otellini worrying about an “engineering shortage” in 2011 in an op-ed for the Washington Post.

“…it is up to us in the private sector to back up our rhetoric with actions and commit to the future workforce we all so desperately need… education disparity threatens to slow our economic recovery, stunts our long-term competitiveness and leaves technology firms in a skills crisis.” … “American universities are simply not producing enough engineers…. If we do not produce suitable candidates for these jobs, companies will go elsewhere in the world to find them.” [link]

What form did this commitment to America’s future workforce take? The full details may be murky, but in an email with the subject-line of “RE: global gentleman agreement with Google – Privileged & Confidential” Otellini helps us understand:

“Let me clarify. We have nothing signed. We have a handshake ‘no recruit’ between eric [Schmidt] and myself. I would not like this broadly known. paul” [link]

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While Intel, Pixar, and Intuit were heavily involved in these arrangements, some of the most noteworthy examples come from Apple and Google executives – those espousing credos striving to think differently and not be evil.

With this in mind, we turn to the follow statements from Google’s Eric Schmidt, concerning the supposed ‘skills shortage’ in America:

“the political leadership of our country is not in agreement with us that the way that you build great wealth for America is you let people be creative, hire as many people as you can, you have RUTHLESS competition, and you build global businesses.” (emphasis his) [link]

"Governments have to do something that's hard… They have to go back and invest in human capital. There are plenty of companies in the U.S. and other countries I've visited that are very short of highly skilled workers." [link]

These statements are not so objectionable on face. But when Schmidt’s policy of hiring as many as he could, and embracing ruthlessly competitive practices, was seen as encroaching on Apple’s territory, Steve Jobs (whose role we will revisit below) sent a quick reproach via email. Eric’s response?

"I'm sorry to hear this; we have a policy of no recruiting of Apple employees. I will investigate immediately! Eric." [link]

In a similar incident, this time involving a Dell employee, Schmidt received the following email from Michael Dell:

“Eric, I learned recently that Google extend an offer to one of our sales guys, [redacted]. Not real happy about this and not the kind of think [sic] we would expect given our partnership. We should discuss next time we are together but I think we should have a general understanding that we are not actively recruiting from each other. Michael” [link]

The response from Schmidt, in concert with two other Google human resources executives, was the following:

“Lets put them on the “don’t call into Dell” list for a while. Thanks, eric” [link]

The aforementioned list did not just include Dell. Internal documents from Google show that they maintained an evolving “Do Not Cold Call” list that included at its maximum 11 companies, as well as an additional “Sensitive Companies” list. A 2008 Google memo makes it clear that “As a general rule, we should not be recruiting staffing talent from any of our approved staffing partners. The lists on the following page outline these partners for both the U.S. and International staffing.” [link]

Lest it appear that I am taking unfair potshots at Eric here, sifting through his past statements to paint an unfavorable impression, it is worth noting that he acknowledged the impropriety of this behavior himself:

"I don't want to create a paper trail over which we can be sued later." [link]

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While Eric Schmidt certainly comes off poorly in the released emails, these documents appear to show that Silicon Valley titan Steve Jobs was a key player in orchestrating these arrangements.

True to the mold, Jobs had been agitating about STEM education in the US for some time. Walter Isaacson, Jobs’ biographer, notes that in a dinner with President Obama in 2011, Jobs made it clear to the President that a shortage of skilled engineers in the US served as a major factor behind Apple’s decision to locate production in China. [link] Per Isaacson:

“You can't find that many in America to hire… If you could educate these engineers, we could move more manufacturing plants here… Those jobs aren't coming back.” [link]

Jobs’ successor at Apple, Tim Cook, felt similarly on this point. Brian Williams questioned Cook on the issue of offshoring production to China, asking what it would take to “make these (iPhones), make everything you make in the US. What would that do to the price?” Cook responded:

“Honestly, it’s not so much about price, it’s about the skills, etc. Over time, there are skills that are associated with manufacturing that have left the US. Not necessarily people, but the education system stopped producing them.” [link]

Perhaps Apple’s executives would not have felt this way about the US high-tech labor market in 2011 and 2012, had they not engaged in their wage-suppressing practices back in 2005. In February of that year, Jobs contacted Google’s Sergey Brin with the following email (in reference to some notable potential hires by Google):

“If you hire a single one of these people, that means war.” [link]

After some back-and-forth between executives from the two companies, the following internal memo was relayed to relevant Apple recruiters by Apple’s VP for Human Resources:

“Please add Google to your ‘hands-off’ list. We recently agreed not to recruit from one another so if you hear of any recruiting they are doing against us, please be sure to let me know. Please also be sure to honor our side of the deal.” [link]

And Google did honor their side of the deal: when Steve Jobs contacted Schmidt in early 2006 over Google recruiters soliciting Apple employees working on the iPod (“Eric, I would be very pleased if your recruiting department would stop doing this. Thanks, Steve”), Schmidt promised swift action. A senior staffing strategist at Google promised that the offending recruiter would be “terminated within the hour,” and in the same email made it clear to Schmidt that “Unfortunately, every six months or so someone makes an error in judgment, and for this type of violation we terminate their relationship with Google. Please extend my apologies as appropriate to Steve Jobs. This was an isolated incident and we will be very careful to make sure this does not happen again.” Google’s head of People Operations agreed that this was an “appropriate response,” asking that they “make a public example of this termination with the group.” [link]

The above email to Brin was strongly worded, but later correspondence between Jobs and Schmidt was more collegial, giving this collusion the appearance of an agreement between friends. Yet not all of Jobs’ attempts to ‘enforce’ the agreement were as polite. A 2007 email from Jobs to Palm CEO Edward Colligan reveals Jobs, upset over Palm’s recruitment strategy, making carefully worded threats in an attempt to convince Palm to change their practices:

“Ed, This is not satisfactory to Apple… We must do whatever we can to stop this. I’m sure you realize the asymmetry in the financial resources of our respective companies when you say: ‘We will both just end up paying a lot of lawyers a lot of money’.”

And then, after discussing a particular patent both companies had taken some interest in, Jobs cautioned:

 “My advice is to take a look at our patent portfolio before you make a final decision here.” [link]

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Tags: corporate practice | education | income taxes | labor market | technology

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